Happy Holidays

Lynn Pregont experienced an odd feeling when she bought a pair of shoes on the first weekend after terrorists struck the U.S. The feeling wasnt buyers remorse  it was guilt.

As a partner/affiliate of The E-tailing Group consulting firm in Chicago, Pregont knew that her purchase represented a small act of defiance to the terrorists and a positive step toward staving off recession. But with more than 6,000 people missing in New York and images of the attack still fresh in her mind, Pregonts shopping excursion was hardly a lark.

"People are feeling a mix of emotions," Pregont said. "Theyre feeling scared. Theyre feeling guilty. Thats why its so important for New Yorks mayor, Rudolph Guiliani, and other government officials to say, Go ahead and shop. Help the economy. People need permission."

Indeed, two weeks after the attacks, consumer confidence plunged to an 11-year low, placing online retailers hopes for a strong holiday season at risk and threatening to turn the steady flow of dot-com retailing bankruptcies into an avalanche.

Exacerbating the broader economic uncertainties are potential transportation and delivery disruptions that could impact a factor crucial for online retail success: reliable and affordable delivery. In the wake of the attacks, airlines have reduced their schedules for passenger flights, which also carry the bulk of air cargo in this country.

Still, there are signs of a silver lining for Net retailers. And to avoid disaster in the make-or-break holiday shopping season for which most will begin to gear up this month, many are now focused on ways to gently transition from a state of mourning to something akin to business as usual.

Back to Business

Some of those moves began in the second week after the attack, as statements of condolence and campaigns for charitable contributions became less dominant on retailers Web sites. Pregont and other retailing consultants and analysts held a conference call with members of trade association Shop.org on Sept. 24 to discuss strategy.

"One of the major questions was: When is it appropriate to take down the messages on your site?" Pregont said. "And the answer is prob- ably now."

For many of the online retailers groping through the uncharted terrain of a post-terrorist-attack marketplace, the telephone conference was a chance to get ideas on how to sell without seeming insensitive.

"What we were saying was, OK, how are we going to come together as a retailing community and support consumers through this personally tragic time, but also get them to shop?" said Elaine Rubin, chairman of Shop.org. "I think what all of us are seeing as a nation is that people are rallying together and taking the sorrow and loss and turning it into a positive connection. And I think that buying and giving and sharing is part of that."

Among the ideas that emerged from the call: gear merchandise toward patriotic or nostalgic themes; emphasize connections with family and friends; and reduce inventory orders if its not too late.

Some potentially positive trends have already surfaced. Indications that people are "cocooning"  staying home with their families and watching the big-screen television  could help sales of consumer electronics.

Online retailers wonder if shoppers will turn more to Internet venues because they are not in the mood for the mall. Gift certificates ordered online and merchandise that can be delivered gift-wrapped might be especially attractive this year.

"People are traveling less this year. So, since theyre not taking their packages to their family members in person, they are likely to order online and have the gifts delivered," said Lauren Freedman, president of The E-tailing Group.

Another theory holds that the money people are not spending on air travel will go instead toward gifts for family members.

Hopeless optimism? Maybe not. One encouraging report came from online retailer BizRate.com, a comparison shopping site and e-commerce researcher, which reported that sales at Internet sites returned to 97 percent of normal in the two weeks following the terrorist attack. That followed a 39 percent drop the day of the attack. Sales for Monday, Sept. 24 were $89.6 million, compared with $92.4 million on Monday, Sept. 10.

"Barring any further unforeseen disasters, we anticipate a gradual recovery from this point forward," said Chuck Davis, BizRates CEO, who predicts online retail sales will hit $11.5 billion in the fourth quarter.

Mary Brett Whitfield, director of PricewaterhouseCoopers E-Retail Intelligence System, agrees. Although she predicted overall retail sales will grow just 1.5 percent in the final quarter of the calendar year, she said online sales could actually grow 30 percent over the same quarter in 2000, to $11.5 billion.

"We really think online is a retail channel that is still growing and is still attracting shoppers," Whitfield said. "Although it is small, we didnt think it would be as impacted as other retail channels."

At this point, though, most forecasts for fourth-quarter online holiday sales are still in flux. Researchers need some solid numbers on fall sales before drawing conclusions about the holiday shopping season.

Like most research firms, Jupiter Media Metrix does not begin sifting its numbers until October. But Jupiters survey of consumers on their online spending plans for holiday shopping was pushed back because it had been scheduled for the same week the terrorists struck.

The National Retail Federation revised its fourth-quarter sales forecast, taking into account the psychological trauma of the terrorist attack less than two weeks before. The previous forecast of 4 percent growth across the broadest categories of merchandise fell to 2.5 percent to 3 percent. But the forecast came with a giant caveat.

"Since the terrorist attacks are so fresh and our countrys response is not yet known, it is premature to make definitive judgments about the economy," said Rosalind Wells, the NRFs chief economist. "We can only speculate based upon what we think the administration will do, and how consumers will respond."

That unknown hangs over the industry like a shroud.

"Theres no historical precedence for this, so no one really knows what will happen," The E-tailing Groups Freedman said. "One of my clients said, What do we do when they start the war? I realized I didnt have any experience in that area. I told them I think the best thing is to make a plan and leave yourself a lot of options."

Critical Quarter Ahead

Like their brick-and-mortar counterparts, most online retailers sink or swim based on the fourth quarter. Some sites earn half their annual income in that period.

While online retailing is growing annually, sales via the Internet account for only a small portion of overall retailing. In 1999, online sales represented 1.1 percent of overall retail. That rose to 1.7 percent last year, with expectations that the figure would rise to 2.5 percent this year. Rubin said Shop.org is projecting online sales of $65 billion this year, a 46 percent increase over last year.

Many retailers remain optimistic that those projections will hold, despite the fact that the attack shut down air transportation, suspended trading on Wall Street and cast a pall over the entire country.

"We havent seen any evidence that were going to be dramatically hit," said Martin McClanan, CEO of online gift retailer RedEnvelope. "We were affected the week of the event, and last week we were ahead of our sales forecast. Were seeing traffic numbers on the Web site go down, but the conversion rate is higher. People are shopping with more purpose."

Surprisingly, McClanan is even sticking to predictions of a profitable fourth quarter: "We havent seen any evidence that that wont occur."

Still, for pure online retailers that survived the first few shakeout years, the terrorist attack and the weakening economy could present a truly daunting future. Consider the track record so far:

Since January 2000, at least 384 Internet companies have shut down.

In June alone, 53 sites closed, nearly matching Mays 54 closures.

Business-to-consumer companies made up 73 percent of all dot-com closures last year and 49 percent of closures in the first six months of this year.

Even before the events of Sept. 11, Merrill Lynch & Co. estimated that 75 percent of todays 300 dot-coms would go under within five years.

The good news for survivors, though, is that most online shoppers ignore or are unaware of the online retail site closures, according to PricewaterhouseCoopers. Only four out of every 10 online shoppers are aware of an online shopping site that has gone out of business, a PricewaterhouseCoopers survey showed. And being aware of a shopping site that has gone out of business does not seem to impact a shoppers decision to continue buying online, according to the study.

"The ghosts of the past are not haunting the online shoppers of the present," PricewaterhouseCoopers Whitfield said.

To survive, however, partnership with the brick-and-mortar retail world may be a crucial strategy.

Surveys show that shoppers are increasingly using the Internet as a research tool, with more than half shopping online and purchasing offline. That fact explains the advantage that companies such as J.C. Penney; Sears, Roebuck and Co.; Target; and Wal-Mart Stores enjoy in online retail.

Companies that have fully integrated their online operations with the rest of their retail operations could have an advantage when cost-cutting begins, said Heather Dougherty, a Jupiter analyst. If the competition begins cutting prices, the retailers can quickly match them both online and in the stores.

Hope for Amazon?

The advantages being realized by traditional retailers have not been lost on Amazon.com, which recently announced a series of partnerships in its effort to finally turn a profit by the end of the year.

Amazon is still the worlds largest online retailer, and boasted 23 million unique visitors in August. Its popularity as a shopping site was surpassed only by eBay, an auction site that most analysts consider to be in a different category.

But for Amazon, the challenge of profitability remains elusive  especially after the terrorist attacks. Before the incident, Amazon vowed to achieve profitability in the fourth quarter. "Were focused like a laser on profitability," Amazon spokesman Bill Curry insisted, quickly adding that "there can be no guarantees."

As a stalking horse for the online industry, Amazons fortunes could signal how much of a future the beleaguered retail e-commerce world really has.

"It may, indeed, be a make-or-break Christmas for them," PricewaterhouseCoopers Whitfield said. "We may see them rationalizing their business. I wouldnt be surprised to see them get out of one or more categories."

Amazon is entering the fourth quarter with a pair of partners that have deep retail experience and broad geographical reach.

Through deals with Circuit City and Target, Amazon will enjoy the benefits of its partners stores while sharing its online expertise and cyberfloor space. Although the Target deal received little attention because it was announced the day the terrorists struck, Amazon still has time to promote the arrangement before the holiday shopping rush.

In its own right, Targets Web site is one of the most popular among U.S. department stores, according to Jupiter. In the deal with Amazon, Target will "open a store" on Amazons site that will include apparel, jewelry, electronics and other products for the home.

Target will also use Amazons e-commerce technology, order fulfillment and customer services at its sites, including GiftCatalog.com, MarshallFields.com, Mervyns.com and Target.com, beginning in the summer of 2002.

Meanwhile, Circuit City will give Amazon a solid storefront for electronics products, allowing shoppers to gather information and order online, then pick up the items in a Circuit City store. The setup is similar to one Sears is launching for the holiday season.

One of the deals benefits for Circuit City is the product information that will be available online, analysts said. Thus, if a shopper goes into a Circuit City store and is unable to find a sales clerk with knowledge about a particular product, he or she can do the research online.

Customers can choose from the Amazon shipping options or immediate pickup from more than 600 Circuit City stores. Items offered by Circuit City that are not offered on Amazons electronics site will be available exclusively for in-store pickup; merchandise offered by Amazon that is not available at Circuit City will be delivered exclusively from Amazon.

The agreements with Circuit City and Target come on the heels of similar deals with Borders Group, Toysrus.com and AOL, which recently increased its stake in Amazon.

While AOL Time Warners $100 million investment in Amazon represents only a 2 percent stake in the company, analysts saw support from the worlds largest media company as a positive sign for Amazon. Access to AOLs 30 million members gives Amazon a chance to enlarge its piece of the online marketing pie even further. AOL members spent a record $7.8 billion shopping online in the three months ended in June.

So far, Amazon has not updated its outlook for the third quarter. At the end of the second quarter, the company said it anticipated steady movement toward profitability, with profits expected by the fourth quarter.

Whitfield agreed that a profitable quarter is not out of the question for Amazon. "I think that, to the extent that it was a reasonable expectation before the attack, its a reasonable expectation now," she said.

Whitfield applauds Amazons deals with other retailers. "They are looking at multiple ways to drive revenue, to become an outsourcer for a number of retailers," she said. "I think theyre looking at ways to maximize revenue  very rightly so. They are looking at what their core strengths, their core competencies, are."

While Amazon CEO Jeff Bezos has made no public statements since the Sept. 11 terrorist attack, on Sept. 6 he was predicting a promising season for his company, despite the slumping economy and a stock price that had recently fallen to a three-year low of $6.85 per share.

"It could be a very promising Christmas season," Bezos said in New York, where he flipped the switch to open the Nasdaq market. "I think there are a bunch of great new products coming out. There are a lot of great video games and other exciting products around the corner."

Among the hot items will be Microsofts Xbox video game console, Nintendos Game Cube and a $19.95 e-marker from Sony that allows users to "tag" a song heard on a radio, then link the marker to a computer, Amazon spokesman Ling Hong said.

In a special presale before the terrorist attack, Toys "R" Us and Amazon sold out the first batch of Microsofts Xbox video game consoles in 30 minutes. The Xbox will not be available at retail outlets until Nov. 8.

Recession or Recovery?

While a recession now seems a foregone conclusion in many economists views, the NRF hopes that the U.S. can dodge the bullet.

"Recession remains a possibility," the NRFs Wells said. "However, we feel that the strong underpinnings of the U.S. economy and the resilience of the U.S. consumer will force the stalling growth over the next few months to give way to a rebound beginning next year."

Is that simply a case of whistling past the graveyard? Its hard to say, according to a study by the Direct Marketing Association.

"While the tendency is to argue that the terrorism committed in Manhattan and Washington, D.C., will push the economy further in the direction of a downturn, there are conceivable scenarios in which the economy, and the direct marketing industry, may indeed grow," Michael A. Turner, the DMAs senior director of strategic information, wrote in a recent report on the terrorist strike.

The backdrop against which the terrorist attack took place was already grim. The economys growth had slowed to 0.2 percent. Industrial output had risen 5 percent. Unemployment was rising, and consumer confidence was falling. Two days after the attack, consumer confidence fell to an eight-year low. Within two weeks, layoffs in the airline industry rose to nearly 100,000, and consumer confidence fell further, to an 11-year low.

Expectations for the next six months were even more pessimistic, according to the survey by The Conference Board. The percent of consumers anticipating business conditions to worsen increased from 10.7 percent to 15 percent. Those expecting fewer jobs increased from 17.7 percent to 21.9 percent. Consumer income prospects were also less optimistic: Only 21.1 percent expect an increase in family income, down from 23.2 percent in August.

"While consumers have managed to keep the U.S. out of a recession for several years now, that soon may no longer be the case," said Lynn Franco, director of The Conference Boards Consumer Research Center.

But those trends could change as government money pours into rebuilding campaigns and airline relief efforts, the DMAs Turner believes. Any progress in the war against terrorism could also buoy consumer confidence.

Citing an upswing in consumer confidence after the U.S. began clearly winning the Gulf War in 1991, Turner wrote: "It is not unreasonable to expect a similar pattern in this instance."

Some economists, however, look at the predicaments of consumers and conclude that its not a lack of will to keep spending, but rather a lack of ability.

Before the terrorist attack, SMR Research in Hackettstown, N.J., predicted that bankruptcy filings would rise by 14 percent to 28 percent this year, driven by divorce, gambling, attorney advertisements, lack of health insurance and the loss of the stigma associated with filing for bankruptcy.

Meanwhile, record-high consumer debt and low personal savings rates have imperiled high-risk borrowers, according to Morgan Stanley Dean Witter & Co. Add to that a deflationary price environment, and operating a retail business becomes very tricky.

Complicating life for online retailers are the flight reductions created by new security measures. While many cargo operators are unlikely to be affected, most cargo is actually carried on planes during passenger flights. The reduced capacity is expected to lead to higher shipping costs at a time when retailers need to offer incentives such as free shipping to entice buyers onto their sites.

The airline industry is also critically important to "just-in-time" inventory systems on which most online operators rely to reduce inventory costs and product cycle times.

"Shipments are probably going to be somewhat of an issue," Jupiters Dougherty said. "Its probably going to take a little more time than people are used to for deliveries."

Since the advent of online retailing, however, shoppers have become more savvy  and realistic  about delivery times, pricing and bargain hunting, analysts said.

Meanwhile, the online retailers have dropped the "gold rush" business plan, in which a niche player is expected to corner the market, then cash in later. That has led to a new understanding of what "normal" means in the online world, Dougherty said. "We will get back to business as usual," she said. "There may be less spending, but I think, eventually, people want to get back to feeling normal again.